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    Assessing Risk with Analytical Procedures: Do...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent 
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    Title:
    Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns?
    Practical Implications:

    The diagrams used in this study contained identical information about changes in accounts; however, auditors who used a diagram that illustrated information in a way that explicitly outlined associations among accounts came to different conclusions about risk than those who used a simple business process diagram. Changing the way information is presented to auditors during the planning phase of an audit could help auditors develop more reliable risk assessments and could significantly improve the audit practice. 

    For more information on this study, please contact Ed O’Donnell.
     

    Citation:

    O’Donnell, E., and J. Perkins. 2011. Assessing Risk with Analytical Procedures: Do Systems-Thinking Tools Help Auditors Focus on Diagnostic Patterns? Auditing: A Journal of Practice and Theory 30 (4): 273-283.

    Keywords:
    analytical procedures; causal-loop diagrams: pattern recognition; risk assessment.
    Purpose of the Study:

    Auditors assigned to an assurance engagement must perform analytical procedures to identify any situations that could increase the risk of material misstatement in accounts. However, even when auditors perform adequate and appropriate procedures to assess risk, auditors often fail to recognize conditions that increase the risk of misstatement. This can occur when evidence manifests through inconsistent fluctuation of related accounts instead of manifesting through inconsistent fluctuations for a single account. This study addresses this auditor weakness by evaluating whether the way information is presented in the diagrams used to perform analytical procedures affects an auditor’s assessment of risk during the planning phase of an audit engagement. The authors suggest that an alternative way of presenting information could potentially allow auditors to more appropriately recognize and respond to patterns of changes in accounts. The two different types of information presentation compared in this study are:

    • Causal-loop diagram- a system-thinking tool that explicitly illustrates associations among process components.
    • Business-process diagram- a diagram that provides equivalent information than that presented in a causal loop diagram but presents it in a different format without explicit illustrations.
       
    Design/Method/ Approach:

    The authors collected the evidence for this study prior to November 2011. The lab experiment was conducted using auditors with audit experience ranging from 20 to 84 months, with an average of 41.7 months. The auditors were randomly assigned to a task that entailed either identifying fluctuations or explaining fluctuations by performing analytical procedure on given financial information with seeded inconsistent fluctuations in related accounts. Half of the participants in each task used the business process diagram while the other half used the causal loop diagram to reach a conclusion.

    Findings:
    • Compared to participants in the experiment who used the business process diagram, those who used the causal-loop diagram found the evidence about patterns in inconsistent fluctuations among related accounts more important and relevant to risk.
    • Compared to participants in the experiment who used the business process diagram, those who used the causal- loop diagram concluded that there was a higher level of misstatement risk given the inconsistent fluctuations in related accounts.
    • The findings suggest that changing the way information is organized and presented to auditors can increase their pattern focus when they perform analytical procedures during the planning phase and could potentially improve their assessment of misstatement risk.
    • Results from this study should be evaluated with respect to the limitations inherent in the laboratory experiment. It is possible that the auditors using the different diagrams could have come to the same conclusion about risk had they had as much evidence as is typically gathered from analytical procedures in real engagements. Future research should address this issue to come to a definitive conclusion about the usefulness of systems-thinking audit tools with respect to assessing misstatement risk.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement